Reeds Inc

Good afternoon and welcome to REIT's second quarter fiscal 2021 earnings conference call for the period ending June 30, 2021. My name is Rachel and I will be your conference call operator today. Today's call is limited to one hour and we will have prepared remarks from Norm Snyder, REIT's Chief Executive Officer, and Tom Spisic, REIT's Chief Financial Officer. Following management remarks, they will take your questions. Before we begin today's call, I have a safe harbor statement to read to our listeners. I would also like to remind you that this conference call will include forward-looking statements. Forward-looking statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be material different from those anticipated by such statements. These factors include, but are not limited to, Reid's ability to manage growth, manage debt, and meet development goals, reduction in demand for products, dependence on third-party manufacturers and distributors, changes in the competitive environment, future business outlook, including the potential impact of COVID-19 on Reid's business, and results of operations and other information detailed from time to time in re-filings with the United States Securities and Exchange Commission. These statements, including financial guidance, involve risks and uncertainties that may cause actual results or trends to differ materially from the company's forecast. The achievement or success of the message covered by such forward-looking statements, including future financial guidance, involves risks, uncertainties and assumptions, many of which involve factors or circumstances that are beyond REIT's control. Fiscal 2021 guidance reflects year-to-date business trends, including the ongoing operating environment related to COVID-19. The COVID-19 pandemic and its related impacts create many incremental potential business risks. including potential impacts to REIT's ability to access raw materials, production, transportation, and all other logistics needs, as well as potential inflation related to all aspects of supply chain and logistics, which cannot be reasonably estimated and are not factored into current fiscal 2021 guidance. Gross margin guidance assumes our known pricing for ingredients, packaging, and production costs. each of which has been and could continue to be impacted by factors related to COVID-19. Financial guidance should not be viewed as a substitute for full financial statements prepared in accordance with GAAP. For more information, please refer to the risk factors discussed in Reid's most recent filed annual report on Form 10-K and the Form 10-Q to be filed with the SEC today. Although management believes that the expectations reflected in forward-looking statements are reasonable, management cannot guarantee future results, levels of activity, performance, or achievements. In addition, any projections as the company's future performance represent management's estimates as of today, August 12, 2021. READS assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. Additionally, please note non-GAAP financial measures referenced during this call are reconciled to the comparable GAAP financial measures in the press release and supplemental materials filed with the SEC and is posted on READS Investor website at investor.readsinc.com. Modified eBazaar is presented because management believes it assists investors and analysts in comparing our performance across reporting periods on a consistent basis By excluding items we do not believe are indicative of core operating performance, the presentation of this non-GAAP financial information is not intended to be considered in isolation or is a substitute for or superior to the financial information prepared and presented in accordance with GAAP and reads non-GAAP measures may be different from non-GAAP measures used by other companies reconciliations of non-GAAP measures to GAAP measures, as well as the definitions of each measure, their limitations and our rationale for using them can be found in this afternoon's press release and in Reid's SEC filing.

I will now turn the call over to Mr. Snyder.

Thank you and good afternoon, everyone. We appreciate you joining us today to discuss our second quarter 2021 results. We continue to experience strong demand for our new product entries and are benefiting from the growth of our expanding DSD network and the increased number of authorizations across all retail sales channels. We believe the momentum that we experienced during the first half of the year is sustainable for the balance of 2021, despite some COVID-19-related challenges that we have recently surfaced. We expect these challenges to be short-term issues that will ease during the second half of the year. Let me start with a summary of the key takeaways from the second quarter to frame our results. First, for the sixth consecutive quarter, we have delivered growth in net sales. This growth is a result of an increase in the number of retail outlets selling our products and strong consumer demand driving higher sales velocity, particularly for ginger ale. During the second quarter, net sales increased at a lower than expected rate due to extended supplier delays, especially with aluminum cans. These delays were temporary, and we believe they will not have a long-term impact on our business. Second, we again delivered continued gross margin improvement, and we have made modifications to mitigate inflationary pressure experienced in several of our cost of goods inputs. Third, while transportation costs remain elevated, we believe they have peaked and will trend back towards 2020 levels during the second half of the year. Fourth, We have made solid progress on the cost savings and operational improvement initiatives we outlined last quarter. Fifth, innovation and expanding distribution continue driving strong demand from consumers and customers. Finally, we remain on track to meet our 2021 financial guidance for net sales growth. Consumer demand for our products remains very strong across our entire portfolio. reflecting positively on our unique innovation launches over the past year as well as our broader distribution. IRI scan data for the year-to-date period is up 16%, overall including a 23% increase in the REEDS brand. Ginger ale growth is accelerating, increasing 693% on a year-to-date basis. REEDS Extra and Zero Extra cans are up 175%, and our reed zero extra bottles are up 66% over the same period. Our Virgil zero sugar line continues to perform well, and scan data reflects increases of 17% year-to-date. In addition, year-to-date velocity continues to increase, up 17.4%, while ACV grew by approximately 2%. We are also starting to see rapidly growing placements for our mocktails, that were introduced this quarter and which have been authorized in several retailers, including Sprouts, Ralph's, Fred Meyer, QFC, Stop and Shop, Ingles, and several more regional chains. Currently available in two varieties, Shirley Tempting and Grape Transfusion, these products are also zero sugar and keto certified. Our business in Canada, CBS, and U.S. military commissaries continue to show growth. In Walmart, we have expanded our business into their mixer sets and recently launched in ShopRite in the northeast. Recently, we conducted a roadshow in Costco's southeast division where we sampled Reed's Ginger Ale, an assortment of Virgil Zero Sugar flavors. The results, again, reinforced the strong consumer response we are seeing at other retailers. More importantly, the feedback underscores that consumers clearly understand and seek the benefits and taste the difference from a ginger ale made with real ginger are affirming our new marketing campaign that real is always better. In addition, the naturally bold flavors of our Virgil Zero Sugar line with no aftertaste continue to resonate with consumers seeking to replicate a full sugar tasting experience that contains zero calories. Let's move to the second quarter results. Net sales increased 4% to over 11 million, reflecting volume gains in both product portfolios. This was below our expectations due to supply chain challenges negatively impacting our ability to fill orders at a normal level. Importantly, based on strong retail demand, we are confident that shortfall will be recovered during the third quarter. Production line time limited manufacturing output at most of our co-packers are facing labor shortages and are unable to adequately staff second and third shifts. In addition, aluminum can shortages and delays in deliveries were again a factor despite our best mitigation efforts. We also experienced delays with our swing lid bottles and caps that ended up sitting on the water in transit waiting for docking times well past the expected delivery dates. We have since received these delayed materials and now have an adequate inventory of packaging materials to meet current and future levels of demand. Gross margin remained a bright spot, and we are pleased with the improvement we delivered despite significant challenges. In the second quarter, our gross margin improved by 150 basis points over the same period last year to 29%. Mix remained a key factor in expanding our margin, reflecting continued execution against our aggressive new production innovation strategy. Cost saving initiatives also help gross margin in the second quarter, much like we experienced in the first quarter. However, we continue to experience price increases across several inputs, which partially offset many of the gains we realized. Through continued aggressive pursuit of cost saving initiatives, we strive to drive further gross margin improvement. In addition, we are passing through a price increase that will be effective during the fourth quarter. Similarly, we made significant progress in improving delivery and handling expenses on a sequential basis. Second quarter delivery and handling expenses were down 24% or $0.8 million compared to the first quarter of 2021 and improved by 490 basis points as a percent of sales. We are in the process of implementing several cost-saving initiatives aimed at reducing our average cost per case expense, which we expect will decrease delivery costs over the remainder of 2021. Modified adjusted EBITDA loss with 3.1 million in the second quarter compared to a loss of 1.4 million in the second quarter of 2020, reflecting deleverage caused by tempered top line gains, which stem from supplier delays exacerbated by elevated transportation costs. We had a strong first quarter in volume output and great retail momentum around many of our new product launches. In the second quarter, our volume output did not meet expectations due to largely factors outside of our control. As many of you recall, I was initially brought into the company as Chief Operating Officer back in 2019 to develop an efficient, scalable platform capable of supporting significant growth. We built that platform, and it runs smoothly under hands-on, detail-oriented leadership. For this reason, I've assumed day-to-day responsibility for all of our operations as an interim measure until such times as we can fill that position. Last quarter, we outlined several efforts to optimize our supply chain by lowering costs, driving efficiency, and mitigating risk. I would like to update you on progress in a few key areas. We modified our procurement procedures and have reduced pricing and or usage rates for several key ingredients. These savings have offset many of the price increases that we incurred, resulting in net savings. We also improved our production planning process, resulting in longer, more efficient production runs, leading to lower loss yields. Our focus on quality and formula optimization contributed to lower cost per case rates and significantly lower obsolescence charges. We will continue to explore additional cost savings initiatives with respect to our cost of goods sold to improve gross margin. Further, we are adding an additional co-packer during Q3 to provide incremental capacity and are participating with our 3PL provider to develop logistic protocols to lower transportation costs and provide additional efficiency. In summary, demand for our products remain very strong across the portfolio. Our focus on platform optimization to deliver improved profitability as we scale has also continued to show solid progress. However, in the second quarter, net sales were adversely impacted by supplier headwinds that caused shipment delays to our customers. We expect the shortfall from Q2 to be realized in Q3. With that, let me turn the call over to Tom Swizak to discuss our financial results in more detail. Tom?